Monday, June 9, 2008
Re: Religion and Economics
I agree with your lack of rationality assumption, but that does not really mean that economically you make a good case for church. First of all your comment on people go to church once a week is exactly in line with my rationality assumption. What I mean is that faced with a non enforcible contract people choose to not deliver fully on their side (such a living a life of pious adoration of God). Second, you cannot allow for an infinite pain solution as that would create a bubble solution, which we know is not sustainable in any model. One needs to assume a non-Ponzi solution for the model to be solvable, which would suggest that people as rational actors would not engage in such a contract.
Thursday, May 22, 2008
Re: Religion and Economics
Although I suppose you are correct in some of what you say. We might assume the cost to be small throughout a lifetime: even if you go to church every Sunday, suppose and contribute a few dollars a week to the collection basket. I guess that what people are doing is twofold. On one hand they are buying insurance against what they believe to be an infinite amount of pain and suffering, such as in the traditional notions of Hell. A small price to pay, just in case it exists. On the other hand, they are also buying peace of mind. That's pretty valuable. Finally, I would add that the main problem is that this is an area in which the rationality assumption goes out the window as religios folks play to the emotional side of people's personalities.
Saturday, May 3, 2008
Tuesday, April 22, 2008
The Role of Government and Market Failure--Part 1 of many
Over the past two years there has been a lot of back and forth between Tom and I over the role of the government and the appropriate size of the government. While I can't safely label any of us as pro large government or not, I do believe that we both agree that governments serve a very important purpose. This is not the purpose I am going to discuss in this post, since I do not want yet to bring into the discussion the role of property rights and contract enforcement. What I want to talk today about is the role of government is smoothing economic crises.
By and large I am looking at the impact of the current oil crisis on both the US and European countries. I think we can all agree that the US has been suffered much more from the rapid increase in oil prices than European countries have. The average citizen now pays a significantly larger chunk of their monthly income on gas, and a lot of the income is spent on gas that is used for rather basic needs with highly inelastic demand curves, such as driving to and from work. The impact on the European worker is significantly lower.
There are many explanation, and the pending baking crisis in The US is but one of them. What I want to focus on is the importance of governments and their role in providing semi-public goods in smoothing out such crises. When it comes to the private market and driving your own car there are many places in the US where the alternatives are virtually inexistent. With few exception, public transportation in the US lacks coverage and fails to provide a significant substitute to driving one's own car.
In contrast, most European countries have significantly better developed public transportation networks. This implies that when oil prices skyrocket people where governments tend to be larger and provide more public good, even if these goods are subsidized, have alternatives and can switch to substitutes, thus avoiding a blow to their monthly balance sheets.
In the following days I will add a simple model that discusses the situations when the existence of semi-public goods as substitutes to purely private goods ends up being beneficial. Until then, I am merely trying to make the point that current events prove that larger governments may add to people's ability to smooth their consumption over time and avoid stochastic shocks. Considering that research shows that most people are risk averse (except maybe very religious people as I mentioned I an earlier post and those who gamble or play the lottery), one could conclude that it is in their best interest to support larger governments who can provide them with this quasi-insurance from unexpected crises.
By and large I am looking at the impact of the current oil crisis on both the US and European countries. I think we can all agree that the US has been suffered much more from the rapid increase in oil prices than European countries have. The average citizen now pays a significantly larger chunk of their monthly income on gas, and a lot of the income is spent on gas that is used for rather basic needs with highly inelastic demand curves, such as driving to and from work. The impact on the European worker is significantly lower.
There are many explanation, and the pending baking crisis in The US is but one of them. What I want to focus on is the importance of governments and their role in providing semi-public goods in smoothing out such crises. When it comes to the private market and driving your own car there are many places in the US where the alternatives are virtually inexistent. With few exception, public transportation in the US lacks coverage and fails to provide a significant substitute to driving one's own car.
In contrast, most European countries have significantly better developed public transportation networks. This implies that when oil prices skyrocket people where governments tend to be larger and provide more public good, even if these goods are subsidized, have alternatives and can switch to substitutes, thus avoiding a blow to their monthly balance sheets.
In the following days I will add a simple model that discusses the situations when the existence of semi-public goods as substitutes to purely private goods ends up being beneficial. Until then, I am merely trying to make the point that current events prove that larger governments may add to people's ability to smooth their consumption over time and avoid stochastic shocks. Considering that research shows that most people are risk averse (except maybe very religious people as I mentioned I an earlier post and those who gamble or play the lottery), one could conclude that it is in their best interest to support larger governments who can provide them with this quasi-insurance from unexpected crises.
Monday, April 14, 2008
Religion and Economics
Last night I watched a completely useless forum where the candidates for president discussed their faith. As an economist, the private beliefs of a candidate are not that important to me as their ability to make rational decisions. However, realizing that religion, abortion and all other issues are significantly important in selecting a president, and that the policy direction implemented by a president can have significant impact on the welfare function of the entire population, I soon realized that right now religion may be an extremely significant economic factor. However, I will address the impact of religion on the economic welfare of the population at a later time. The post today will be about an economic view of religion.
To keep it simple, I would like to claim that people who are religious and follow closely the prescripts of their church should be risk loving. This view, I know disagrees with the general view, that people who are very religious tend to be risk averse.
Let's just analyze what it means to be religious from an economic perspective. Assuming rational behavior as well as keeping to some extent to the constraints of Christianity (mainly because I have no experience with any other religion) I will try to prove my claim.
To begin with, being religious, belonging to a church and following all that is required is rather like engaging in a contract. One makes sacrifices today (i.e. pays the price for the good) in order to receive salvation at a later time (i.e. obtain the good). Thus we are looking at intertemporal utility maximization, with the objective function being maximized after the agent dies. Many people view this as insurance, as I have said. I tend to view it in a different way. These people engage in a contractual agreement in lack of an established market for the product. Additionally, the pseudo market that exists (church) tends to be very monopolistic (I know that there are many religions and even more churches, however each of them claims that they are THE ONLY ONE who can guarantee your salvation). This in itself is irrational because there is no guarantee that the contract is enforcible. In other words people who are religious and accept the reduction in utility stemming from following the dictates of their religion, engage in a non enforcible contract where property rights are at best fuzzy. This increases the probability that the contract will not be delivered upon, hence it reduces their expected payoff. This in turn results either in them not being as strict as they should in following the contract, or in them getting utility from the increased risk resulting from this contract. To date there is little evidence, if any, that the contracts are enforced, as the delivery of the product is virtually impossible to observe.
So then the question remains, why do people choose to buy this insurance if the enforcement of the contract is uncertain? I do not claim to have an answer, or at least not an answer that is better than "because people also play the lottery, even though their expected return is ALWAYS negative." I think religion is the ultimate proof that people are risk loving. After all, it's like buying insurance at a high premium today for the space shuttle you MIGHT own in the future.
To keep it simple, I would like to claim that people who are religious and follow closely the prescripts of their church should be risk loving. This view, I know disagrees with the general view, that people who are very religious tend to be risk averse.
Let's just analyze what it means to be religious from an economic perspective. Assuming rational behavior as well as keeping to some extent to the constraints of Christianity (mainly because I have no experience with any other religion) I will try to prove my claim.
To begin with, being religious, belonging to a church and following all that is required is rather like engaging in a contract. One makes sacrifices today (i.e. pays the price for the good) in order to receive salvation at a later time (i.e. obtain the good). Thus we are looking at intertemporal utility maximization, with the objective function being maximized after the agent dies. Many people view this as insurance, as I have said. I tend to view it in a different way. These people engage in a contractual agreement in lack of an established market for the product. Additionally, the pseudo market that exists (church) tends to be very monopolistic (I know that there are many religions and even more churches, however each of them claims that they are THE ONLY ONE who can guarantee your salvation). This in itself is irrational because there is no guarantee that the contract is enforcible. In other words people who are religious and accept the reduction in utility stemming from following the dictates of their religion, engage in a non enforcible contract where property rights are at best fuzzy. This increases the probability that the contract will not be delivered upon, hence it reduces their expected payoff. This in turn results either in them not being as strict as they should in following the contract, or in them getting utility from the increased risk resulting from this contract. To date there is little evidence, if any, that the contracts are enforced, as the delivery of the product is virtually impossible to observe.
So then the question remains, why do people choose to buy this insurance if the enforcement of the contract is uncertain? I do not claim to have an answer, or at least not an answer that is better than "because people also play the lottery, even though their expected return is ALWAYS negative." I think religion is the ultimate proof that people are risk loving. After all, it's like buying insurance at a high premium today for the space shuttle you MIGHT own in the future.
Re: Moral Hazard with Auctions
Interesting experience you had there, but I think that there a a number of reasons why it didn't play out the way you think it did. Also, what I find interesting is that again we found out that people are irrational, rather than rational. Here is a very quick rundown of how I see your problem.
First, you assumed irrationality from your bidders. You posted the ad as a first price sealed bid. That should have resulted in bids that are close to people's valuations. You assumed it did not (hence you assumed irrationality) and decided to turn it into a second price sealed bid auction, which resulted in an increase in your profits.
Second, you introduced signals into the equation. By offering the two top bidders the chance to increase their bids, you allowed them to get signals, which turned the auction from a sealed one into an open one (rather close to an English style auction). This also changed the dynamics and should have allowed you to extract as much surplus as possible, but still end up with a second best solution. However, you introduced another constraint by limiting the number of bids you would accept from your top two bidders. This cut into your surplus, because now you gave them information that allowed them to determine that your reservation price has long been met, and also that you follow a less than rational path in your decision making.
All in all, I think you reduced your potential profit by showing eagerness to conclude the deal. Additionally, you reduced your profit by engaging in an auction style that resembled more an open auction rather than a closed one. Open auctions never yield the best outcome. I think, if we return to the assumption of rationality (which was clearly violated by your bidders) that you can achieve the first best solution from your perspective with a model that follows something like this:
--announce the auction
--contact your top two bidders, let them know what the highest bid right now is and ask them to turn in a single bid, sealed and the winner of the bid takes the tickets
--get the bids and give the tickets to the highest bidder.
This way you circumvent the problem of irrationality in the first bid to a certain extent. While people may be irrational in their first bid, by limiting the bidding war to a single second step you maintain the bid as a closed one, and thus you can extract their valuation. Continuing to accept small incremental changes (or even large) would result in a second best solution.
However, removing the rationality constraint and allowing for incomplete information inclusive of one's own valuation, your solution may be more appropriate. I think this may be an interesting research case in which we allow signals/changes in information sets to affect our valuation, thus the result of an English auction may yield more surplus to the seller than a sealed auction.
First, you assumed irrationality from your bidders. You posted the ad as a first price sealed bid. That should have resulted in bids that are close to people's valuations. You assumed it did not (hence you assumed irrationality) and decided to turn it into a second price sealed bid auction, which resulted in an increase in your profits.
Second, you introduced signals into the equation. By offering the two top bidders the chance to increase their bids, you allowed them to get signals, which turned the auction from a sealed one into an open one (rather close to an English style auction). This also changed the dynamics and should have allowed you to extract as much surplus as possible, but still end up with a second best solution. However, you introduced another constraint by limiting the number of bids you would accept from your top two bidders. This cut into your surplus, because now you gave them information that allowed them to determine that your reservation price has long been met, and also that you follow a less than rational path in your decision making.
All in all, I think you reduced your potential profit by showing eagerness to conclude the deal. Additionally, you reduced your profit by engaging in an auction style that resembled more an open auction rather than a closed one. Open auctions never yield the best outcome. I think, if we return to the assumption of rationality (which was clearly violated by your bidders) that you can achieve the first best solution from your perspective with a model that follows something like this:
--announce the auction
--contact your top two bidders, let them know what the highest bid right now is and ask them to turn in a single bid, sealed and the winner of the bid takes the tickets
--get the bids and give the tickets to the highest bidder.
This way you circumvent the problem of irrationality in the first bid to a certain extent. While people may be irrational in their first bid, by limiting the bidding war to a single second step you maintain the bid as a closed one, and thus you can extract their valuation. Continuing to accept small incremental changes (or even large) would result in a second best solution.
However, removing the rationality constraint and allowing for incomplete information inclusive of one's own valuation, your solution may be more appropriate. I think this may be an interesting research case in which we allow signals/changes in information sets to affect our valuation, thus the result of an English auction may yield more surplus to the seller than a sealed auction.
Re: SPAM
Tom, you raise an interesting question and touch on exactly what I was aiming to do with my post, namely address the disparity between producer costs and consumer costs. No one really looks at consumer costs when measuring the cost of SPAM. My point was that it adds up to being significant, even if we try to downplay it like you do in your post.
In a way, I was suggesting that spam be viewed as a whole phenomenon, not as separate emails you need to take care of. As for costs on the side of the consumer, I would have to disagree with you that they are overall insignificant. Maybe my estimation was wrong (and it probably was) but I would believe that if anything the cost of SPAM is socially higher than what I estimated that what I came up with.
For one thing, the filters you mention that corporate emails have cost money. Actually, they cost a lot of money to acquire, maintain and update. For another thing, we also incur SPAM costs in emails other than corporate ones and at times when we are not at work. Now basic econ theory tells us that we must value our time outside of work (i.e. leisure) at least marginally at the same rate as the per hour wage or we would not be choosing to consume so much leisure.
I will agree with you that potentially companies who engage in spam make a buck out of it, but my question was not aimed at these companies, it was aimed at society as a whole. Unlike accountants who can make any cost look like revenue and any loss look like a healthy profit, us economists have to consider the broader picture. And to me, in the broader picture spam is like pollution, with the exception that it is socially optimal to accept a certain level of pollution in order to promote growth (and I am not sure that it is socially optimal to accept a certain level of spam).
In a way, I was suggesting that spam be viewed as a whole phenomenon, not as separate emails you need to take care of. As for costs on the side of the consumer, I would have to disagree with you that they are overall insignificant. Maybe my estimation was wrong (and it probably was) but I would believe that if anything the cost of SPAM is socially higher than what I estimated that what I came up with.
For one thing, the filters you mention that corporate emails have cost money. Actually, they cost a lot of money to acquire, maintain and update. For another thing, we also incur SPAM costs in emails other than corporate ones and at times when we are not at work. Now basic econ theory tells us that we must value our time outside of work (i.e. leisure) at least marginally at the same rate as the per hour wage or we would not be choosing to consume so much leisure.
I will agree with you that potentially companies who engage in spam make a buck out of it, but my question was not aimed at these companies, it was aimed at society as a whole. Unlike accountants who can make any cost look like revenue and any loss look like a healthy profit, us economists have to consider the broader picture. And to me, in the broader picture spam is like pollution, with the exception that it is socially optimal to accept a certain level of pollution in order to promote growth (and I am not sure that it is socially optimal to accept a certain level of spam).
Saturday, April 5, 2008
Moral Hazard in Auctions
I had an interesting experience today. I was looking on Craigslist for an extra ticket to the Caps game and I noticed the asking prices were outrageous. So I decided to throw mine up on there to see how much I could get for them. I stated in my ad, best offer by 3pm.
The offers poured in, but one guy (A) offered a much larger amount. Then finally another guy (B) offered to top it. I told him to hang on because I owed A the chance to top the previous bid. I called the original high bidder told him of the offer and gave him the chance to raise his bid and he offered 50 dollars more (Bid: 1). I called B back and told him that he had to top Bid: 1. At this point I had not told him the amount of Bid: 1 and thought briefly about telling him it was much higher, a moral hazard problem we try to avoid in second price sealed bid auctions. Instead, I told him the true price and this was my reasoning:
If I tell this guy too high a price, he'll back out and my outside option will be Bid:1. I don't know what amount this is that will cause him to back out, but if I tell him the real amount he will top it or back out leaving me Bid: 1. Therefore my expected profit will be higher to be truthful. My incentive is to be truthful unless I know what his price elasticity looks like.
Exp. Profit = p(Bid: 1) + (1-p)(Bid: 1 +a), p is between 0 and 1, a is a high number
But if I'm truthful:
Exp. Profit = p1(Bid: 1) + (1-p1)(Bid: 1+e), where e=a small number, p1
I believe the uncertainty would push p close to 1 and certainty will push p1 close to zero. Therefore a would have to be very large for lying to be profitable. But I think this will almost never happen because a is bounded above by the bidder's internal valuation and we have almost no information about where that bound might be. Getting e more than the bid is preferable to taking the chance as a risk averse individual.
Now, what would prevent me from playing the two bidders off against each other? Well people generally don't like that and I run the risk of losing both of them if I do that. People want to like the person they buy stuff from and they could both back out if they think I'm running a game on them. I can get away with it once perhaps, but to continuously do it is much more difficult.
What do you think? Is there a self enforcing mechanism in this type of auction?
The offers poured in, but one guy (A) offered a much larger amount. Then finally another guy (B) offered to top it. I told him to hang on because I owed A the chance to top the previous bid. I called the original high bidder told him of the offer and gave him the chance to raise his bid and he offered 50 dollars more (Bid: 1). I called B back and told him that he had to top Bid: 1. At this point I had not told him the amount of Bid: 1 and thought briefly about telling him it was much higher, a moral hazard problem we try to avoid in second price sealed bid auctions. Instead, I told him the true price and this was my reasoning:
If I tell this guy too high a price, he'll back out and my outside option will be Bid:1. I don't know what amount this is that will cause him to back out, but if I tell him the real amount he will top it or back out leaving me Bid: 1. Therefore my expected profit will be higher to be truthful. My incentive is to be truthful unless I know what his price elasticity looks like.
Exp. Profit = p(Bid: 1) + (1-p)(Bid: 1 +a), p is between 0 and 1, a is a high number
But if I'm truthful:
Exp. Profit = p1(Bid: 1) + (1-p1)(Bid: 1+e), where e=a small number, p1
I believe the uncertainty would push p close to 1 and certainty will push p1 close to zero. Therefore a would have to be very large for lying to be profitable. But I think this will almost never happen because a is bounded above by the bidder's internal valuation and we have almost no information about where that bound might be. Getting e more than the bid is preferable to taking the chance as a risk averse individual.
Now, what would prevent me from playing the two bidders off against each other? Well people generally don't like that and I run the risk of losing both of them if I do that. People want to like the person they buy stuff from and they could both back out if they think I'm running a game on them. I can get away with it once perhaps, but to continuously do it is much more difficult.
What do you think? Is there a self enforcing mechanism in this type of auction?
Re: SPAM
First off let me open by saying that I totally agree with your first paragraph. I'm sure we will get bogged down (no pun intended) in the intricacies of grandiose economics at some point, but I think in order to be readable, this blog needs to intermix the everyday of economics with the hardcore mathematical modeling.
So in that vein I turn to your argument about SPAM. It seems to me that you are missing one of the fundamental rules of economics when you question SPAM and in particular, the result of SPAM. I did some research on the effectiveness of SPAM can could find nothing. Perhaps those who engage in it prefer to call it something else. But in the absence of proof I will fall back on good old economic reasoning.
SPAM must have some success rate as those who send it wouldn't do so unless there was some benefit. Rational actors, if presented with a welfare loss will cease that activity. The problem is that the marginal cost of SPAM must be very small. I'm going to guess that it approaches zero. Therefore, it doesn't take but a few people to open those emails or respond to an offer to make it worthwhile. As far as creating jobs, I'd be surprised if it actually created a job as I'm going to guess they buy a program, buy a list and have someone already working there spend five minutes a day pushing out SPAM. I'm sure internet savvy people like me or yourself, filter these emails, send them to the trash without reading them, but I am sure many do not. Case in point, the fake emails that come from Nigeria, saying they have 2.5 million sitting in a bank account and they need the $1000 transfer fee plus your credit information in order to be able to give it to you. People actually fell for this and continue to do so. Likewise, I'm sure SPAM has some success rate that creates incentive for a company to engage in it.
Are there larger welfare questions for society at large? I'm sure SPAM creates disutility and causes costs to society. But outlawing it seems difficult. The fact is, you don't get much SPAM in companies or schools for that matter. There are very good filtering systems in place. Yes they probably have a high capital cost, but again, marginal cost goes to zero. SPAM is really only a problem in personal emails in web-based email clients such as Gmail, Hotmail or Yahoo Mail. In this case, the email user makes a personal choice to use this email. Any disutility experienced is done so by choice. Also, I must admit, as one who has all three, Yahoo has by far the worst filter. Gmail is the best. I almost never get SPAM in my Gmail inbox.
I'm not saying I like SPAM, but I think that the effects are much smaller than you make them out to be on the consumer side. On the producer side, there must be some net positive gain or companies would not engage in it. And plus, sometimes the subject lines are really funny.
So in that vein I turn to your argument about SPAM. It seems to me that you are missing one of the fundamental rules of economics when you question SPAM and in particular, the result of SPAM. I did some research on the effectiveness of SPAM can could find nothing. Perhaps those who engage in it prefer to call it something else. But in the absence of proof I will fall back on good old economic reasoning.
SPAM must have some success rate as those who send it wouldn't do so unless there was some benefit. Rational actors, if presented with a welfare loss will cease that activity. The problem is that the marginal cost of SPAM must be very small. I'm going to guess that it approaches zero. Therefore, it doesn't take but a few people to open those emails or respond to an offer to make it worthwhile. As far as creating jobs, I'd be surprised if it actually created a job as I'm going to guess they buy a program, buy a list and have someone already working there spend five minutes a day pushing out SPAM. I'm sure internet savvy people like me or yourself, filter these emails, send them to the trash without reading them, but I am sure many do not. Case in point, the fake emails that come from Nigeria, saying they have 2.5 million sitting in a bank account and they need the $1000 transfer fee plus your credit information in order to be able to give it to you. People actually fell for this and continue to do so. Likewise, I'm sure SPAM has some success rate that creates incentive for a company to engage in it.
Are there larger welfare questions for society at large? I'm sure SPAM creates disutility and causes costs to society. But outlawing it seems difficult. The fact is, you don't get much SPAM in companies or schools for that matter. There are very good filtering systems in place. Yes they probably have a high capital cost, but again, marginal cost goes to zero. SPAM is really only a problem in personal emails in web-based email clients such as Gmail, Hotmail or Yahoo Mail. In this case, the email user makes a personal choice to use this email. Any disutility experienced is done so by choice. Also, I must admit, as one who has all three, Yahoo has by far the worst filter. Gmail is the best. I almost never get SPAM in my Gmail inbox.
I'm not saying I like SPAM, but I think that the effects are much smaller than you make them out to be on the consumer side. On the producer side, there must be some net positive gain or companies would not engage in it. And plus, sometimes the subject lines are really funny.
Friday, April 4, 2008
The First Post
OK, so I was thinking of kicking off our arguments with some topic of great importance like poverty, sustainable development, the pending economic recession, or something that sounds at least as monumental, if not more. As I sat down to write about this stuff I realized that we are going to discuss economics here, and to be fair to the discipline economics is much more than just these grandiose topics that seem to have no solution (and do not let yourself be fooled they do, but any solution that economists come up with is heavily affected by politicians, who like any rational actors follow their own interest). Standard econ textbooks tell us that economics studies how people make choices. I think economics try to explain every day life in highly stylized mathematical models that only the select few understand, or as a student of mine once put it, without the math and the graphs econ is nothing but common sense (whose sense, though, is still to be determined). Thus, I paused trying to come up with something more mundane, and, as any good citizen of cyber land I checked my email (yet again today). And then it hit me. The first post ever on this blog should be about something so basic, so trivial that we hardly ever think about it: SPAM.
So, here is my take on spam. Companies who advertise through the use of such emails are either stupid or are engaging in negative advertising. How many spam emails do you get every day? I get on average 50 or so. How many do you read? Absolutely none. Why? Because it’s SPAM. Then why do they still do it? My guess is that someone told the execs in these companies that this is a relatively cheap way to advertise. Indeed, in between advertising methods, it really is. The problem with it, though, is that it creates a lot of disutility to the user whenever the message passes through one’s spam or junk filters. Every time one of these buggers makes it though, you have to go through the trouble of deleting it. That takes time. And time is money. Additionally, you have to sometimes report the message as spam, and that takes time as well. You may have to reset your junk mail filters, and, guess what, that takes time as well. And when all this is said and done, you feel a little upset over the whole thing, and that is disutility as well.
Overall, there seem to be few benefits to a spam campaign, and quite a lot of negatives, though I have to admit that sometimes people do click on the links, and many times they find out that the product advertised requires you to buy another 15 products that you have no use for but may seem to be cool. When all is balanced, though, I am amazed at the low success rate of spam emails. I read somewhere that telemarketers have a 1-2% success rate. I don’t know what the rate for spamming is, but I am sure it is at least 100 times smaller.
So why do companies do it? Because spam does have positive benefits overall. First it creates jobs. On the one hand it creates jobs for people who have to write the program for the mass emailing, those who have to write the message and those who actually pack and ship the products that people who are fooled by this kind of emails to order. On the other hand, it creates jobs for people who set up and maintain the junk mail filters and for customer support representatives who deal with clients angry over the amount of junk in their inboxes (alas these jobs have already been shipped oversees).
Second it can be a useful tool for negative publicity. Not that I know of anyone using it this way, but that is just because marketing people, for all their “creativity” seem to follow the status quo. If I were Nokia and was about to come out with some kickass phone, I would make sure that your inbox is flooded with various emails trying to woo you into buying an Iphone (but of course you would have to buy the other 15 things as well). By the time I’d be done with you, you’d be so fed up with the Iphone that when you see my Nokia add you will think that is a refreshing change and would want to give it a try. There is such a thing as saturation level advertising and spamming can definitely get one there fast.
You may wonder why I am ranting about the pluses and minuses of spam. The answer is simple, I am guessing that spamming is more damaging to the economy than it is actually supporting it. A simple model can test that. Take the number of hours required to put together a program needed to mass email. Now add in a database that you buy from Walmart or CVS. Now imagine how many times one can use that database and the program. This is your spamming cost on the producer side. Now imagine all the people at work who have to delete these emails. Let’s assume one second per email, with a recipient list of 6 million people (and many times lists are much larger than that) simply deleting one email that goes out to all these people would take more than 1,500 hours. Now multiply this by the number of emails that go out every day. And now remember that most of us do this while at work, thus all of these hours are work time that we forgo so we can just get rid of spam. That is the user’s spamming cost. Makes you wonder how come it has not been outlawed yet….
Attached is a simple computation with purely fictitious numbers to show how much time spam takes a day. This computation ignore costs that go into setting up spam filters as well as the assumption that inboxes on Mondays have more spam than any other day, thanks to the time off we have on weekends. These numbers have no scientific basis and are used for purely illustration purposes.
Email accounts economy wide: 300,000,000
Average time it takes to delete an email: 1 sec.
Expected number of junk emails that bypass spam filters and end up in people’s mailboxes: 5/day
Number of hours spent daily on erasing junk email: 416,667 (or 208+ yearly FTE wasted every day)
Number of working days in a calendar year: 250
Yearly hours spent on deleting junk email: 104,166,167
Average hourly wage of people deleting spam: $15/hour
Yearly cost of deleting junk email: $1,562,500,000 (that’s right, over $1.5 billion)
So, here is my take on spam. Companies who advertise through the use of such emails are either stupid or are engaging in negative advertising. How many spam emails do you get every day? I get on average 50 or so. How many do you read? Absolutely none. Why? Because it’s SPAM. Then why do they still do it? My guess is that someone told the execs in these companies that this is a relatively cheap way to advertise. Indeed, in between advertising methods, it really is. The problem with it, though, is that it creates a lot of disutility to the user whenever the message passes through one’s spam or junk filters. Every time one of these buggers makes it though, you have to go through the trouble of deleting it. That takes time. And time is money. Additionally, you have to sometimes report the message as spam, and that takes time as well. You may have to reset your junk mail filters, and, guess what, that takes time as well. And when all this is said and done, you feel a little upset over the whole thing, and that is disutility as well.
Overall, there seem to be few benefits to a spam campaign, and quite a lot of negatives, though I have to admit that sometimes people do click on the links, and many times they find out that the product advertised requires you to buy another 15 products that you have no use for but may seem to be cool. When all is balanced, though, I am amazed at the low success rate of spam emails. I read somewhere that telemarketers have a 1-2% success rate. I don’t know what the rate for spamming is, but I am sure it is at least 100 times smaller.
So why do companies do it? Because spam does have positive benefits overall. First it creates jobs. On the one hand it creates jobs for people who have to write the program for the mass emailing, those who have to write the message and those who actually pack and ship the products that people who are fooled by this kind of emails to order. On the other hand, it creates jobs for people who set up and maintain the junk mail filters and for customer support representatives who deal with clients angry over the amount of junk in their inboxes (alas these jobs have already been shipped oversees).
Second it can be a useful tool for negative publicity. Not that I know of anyone using it this way, but that is just because marketing people, for all their “creativity” seem to follow the status quo. If I were Nokia and was about to come out with some kickass phone, I would make sure that your inbox is flooded with various emails trying to woo you into buying an Iphone (but of course you would have to buy the other 15 things as well). By the time I’d be done with you, you’d be so fed up with the Iphone that when you see my Nokia add you will think that is a refreshing change and would want to give it a try. There is such a thing as saturation level advertising and spamming can definitely get one there fast.
You may wonder why I am ranting about the pluses and minuses of spam. The answer is simple, I am guessing that spamming is more damaging to the economy than it is actually supporting it. A simple model can test that. Take the number of hours required to put together a program needed to mass email. Now add in a database that you buy from Walmart or CVS. Now imagine how many times one can use that database and the program. This is your spamming cost on the producer side. Now imagine all the people at work who have to delete these emails. Let’s assume one second per email, with a recipient list of 6 million people (and many times lists are much larger than that) simply deleting one email that goes out to all these people would take more than 1,500 hours. Now multiply this by the number of emails that go out every day. And now remember that most of us do this while at work, thus all of these hours are work time that we forgo so we can just get rid of spam. That is the user’s spamming cost. Makes you wonder how come it has not been outlawed yet….
Attached is a simple computation with purely fictitious numbers to show how much time spam takes a day. This computation ignore costs that go into setting up spam filters as well as the assumption that inboxes on Mondays have more spam than any other day, thanks to the time off we have on weekends. These numbers have no scientific basis and are used for purely illustration purposes.
Email accounts economy wide: 300,000,000
Average time it takes to delete an email: 1 sec.
Expected number of junk emails that bypass spam filters and end up in people’s mailboxes: 5/day
Number of hours spent daily on erasing junk email: 416,667 (or 208+ yearly FTE wasted every day)
Number of working days in a calendar year: 250
Yearly hours spent on deleting junk email: 104,166,167
Average hourly wage of people deleting spam: $15/hour
Yearly cost of deleting junk email: $1,562,500,000 (that’s right, over $1.5 billion)
Sunday, March 30, 2008
Welcome
Well, this blog is going to be a continuous debate on different issues, ideas, etc. Between myself and my esteemed (sometimes) colleague, Bogdan.
Let the games begin!
Let the games begin!
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